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November 2004 - Volume 1 - Issue 4
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Providers Should Take a Hard and Close Look at Their Operations

Despite the fact that the health care industry now comprises the greatest component of the nation’s gross domestic product, most physicians will tell you that this has not translated into a windfall for them. To the contrary, shrinking reimbursements, ever increasing expenses, various and sundry regulatory restrictions (and the costs associated therewith) have continued to erode physicians’ incomes.

Despite what has for the most part been a downward trend, too few physicians take the time to critically evaluate their business practices. The following represents a number of areas where physicians are apt to discover lost revenues, eliminate expenses and ultimately increase their bottom lines:

Billing/Collection
The lifeblood of any medical practice, from a financial standpoint, is its billing and collection functions. Whether done in-house or by an outside billing company, it is critical for medical practices to regularly evaluate their performance on this front. This should include:

  • Maintaining an acceptable collection ratio (i.e, cash collected divided by gross charges);
  • Minimizing the aging of accounts receivable;
  • Ensuring proper collection of deductibles and co-pays; and
  • Evaluating policies regarding follow-ups, rights-offs and other adjustments.

    Evaluating Third-Party Payor Arrangements
    An all too familiar story, a physician is presented with an agreement from a third-party payor and simply signs it without determining whether the agreement makes sense from an economic standpoint. In many cases, these arrangements go on indefinitely. The solution is hardly profound:

  • Carefully review third party payor contracts to determine whether the reimbursement allows the practice to cover its costs and to generate a profit;
  • If the arrangement does not make sense from an economic standpoint, attempt to renegotiate the financial terms; and
  • If the payor is unwilling to renegotiate the agreement’s term, terminate the agreement or simply not renew when the agreement expires.

    Developing Relationship with Providers that Make Sense
    Too often, practices bring in a new physician without giving thought to the economic practicality associated with the manner in which the physician will be compensated. Simply entering into an agreement to pay what the market will bear can be a recipe for disaster. Correspondingly, putting associate physicians on a guaranteed partnership track after the expiration of some agreed upon time frame, without taking into consideration the economics of the arrangement, can be equally as disastrous. In lieu of blindly wading into an employment relationship, it is recommended that practices:

  • Project the anticipated revenue that will be generated by the associate physician; and
  • Subtract from the aforementioned amount, the associate physician’s allocable share of overhead and the expected direct expenses.

    This relatively simple exercise will not only allow the practice to establish a feasible base compensation, but will allow the practice to establish a sensible bonus formula (for example one based on productivity, whereby a physician receives a specified percentage of collections in excess of a certain dollar threshold).

    Ancillary Services
    Many physicians who historically referred out a host of ancillary services have considered providing these services in-house in order to capture the revenues for these services. These arrangements carry with them a variety of legal and regulatory hurdles under the Anti-Kickback statute and the self-referral laws at the state and federal level. Beyond these hurdles, the practice needs to critically evaluate not only what it can expect by way of anticipated revenue, but the true costs associated with bringing these services in-house.

    Tax Matters
    Many practices, particularly those that have been in existence for some time, are very likely to be operating as C corporations (entities which are tax paying entities in and of themselves). In an attempt to avoid double taxation, these entities bonus out compensation to the principals, thus reducing or eliminating the corporation’s taxable income. A relatively recent case out of the United States tax court, Pediatric Surgical Associates v. Commissioner of Internal Revenue, calls this methodology into question, particularly where the amounts bonused represent, in whole or in part, revenues attributable to associate physicians (and, logically, from ancillary services). In Pediatric Surgical Associates the amounts which were treated as bonuses were recharacterized as dividends, resulting in taxable income at the entity level and dividend income in the hands of the shareholders. Practices that may be in this position may be advised to:

  • Avoid paying bonuses which would cause a shareholder’s compensation to exceed the aggregate of what that physician generated by way of his or her own personal services; and
  • Consider restructuring the practice as a pass-through entity (such as a sub-chapter S corporation).

    Amazingly, and to this day, many physicians have not established a qualified retirement plan. With a wide range of options, from defined benefit plans to simple IRA’s, physicians have the ability to defer paying tax on what can, in many cases, be a significant portion of their income, while at the same time accumulating assets which cannot be touched by their creditors.

    Malpractice Insurance
    Despite the adoption of the Medical Malpractice Reform Act last year, physicians still face unprecedented premiums for malpractice insurance coverage. The question on many physicians’ minds – should I go bare? There is certainly a point at which malpractice premiums become economically unfeasible for many medical practices. It is not unheard of for annual premiums to exceed the per claim limit on the policy. In the end, the decision to self-insure or go bare is a very personal one and involves not only issues of economics, but the risk tolerance of the physician or physicians in question. Physicians may give some consideration to the following:

  • If they opt to drop their coverage, not only will they become responsible for satisfying a judgement, but incurring the costs for the defense of a claim;
  • There may be other alternatives to dropping coverage entirely (i.e., lowering the policy limits, incorporating a deductible into the policy, etc.); and
  • It is critical for physicians who opt to drop their coverage to carefully consider their asset protection strategies.

    As many providers continue to experience downward pressure on their earnings, nothing can replace a hard, close look at both sides of the income statement.

  • Mark A. Coel, Esq. is a board certified health law attorney and partner with Michaud, Buschmann, Mittelmark, Millian, Blitz, Warren & Coel, P.A., in Boca Raton, Florida. He may be reached at (561) 392-0540 or at Mcoel@michaudlaw.com
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